Originally published in the Brandywine Asset Management Monthly Report.
In Jackass Investing, Mike Dever recounts the story of the siege of Paris in 1871 and the quote made famous at that time when Baron Rothschild told a new investor to “buy securities when there was blood in the streets.” We’ve seen great investors do this time after time. They take advantage of investment opportunities that others are afraid to exploit. But the average person does just the opposite. We know this with certainty (the data is presented in Mr. Dever’s book) and have based a number of Brandywine’s sentiment trading strategies on this return driver. In those strategies Brandywine looks for extremes in market sentiment to take short-term trades opposite the crowd. We apply this approach to both financial (stock indexes, interest rates) and commodity markets. If you’d like to read the chapter where Mr. Dever discusses this (along with an actual trading strategy for trading stock indexes that is revealed in the book’s Action Section), just follow this complimentary link: http://bit.ly/oDQYX8.
The same opportunity can also present itself when evaluating a manager with which to invest. Every investment manager has periods where they outperform and underperform their expected returns. Those managers with less-diversified portfolios tend to have more extreme performances, while those trading more diversified portfolios may have less extreme variations in performance. In the case of Brandywine’s Symphony program, our broad strategy and market diversification has resulted in performance volatility of less than half that of the S&P 500. At the same time we are targeting returns of 12% annually, which is in excess of those to be expected by buying and holding stocks (of course we must remind you that past performance is not indicative of future performance).
But even with a low volatility of returns, Brandywine will regularly incur losing periods. The past three months have been one such period. After reaching new performance highs at the end of March, Brandywine’s Symphony program dropped -4.63% in the 2nd quarter. A drawdown of this moderate size is expected to occur at least once each year. So the question is what to expect going forward. Using history as our guide, we see that similar losing periods are followed, on average, by a positive return of more than 18% (net to our investors) over the subsequent 12 months.
What this points out is that now may be an excellent time to invest with Brandywine. If you follow the approach used by most successful investors, although there is not “blood in the streets” (Brandywine’s diversified approach is intended to avoid such dramatic losing spells), our current drawdown may be a great opportunity to start your investment with Brandywine. In addition to performance, if you have an equity-dependent portfolio, an investment with Brandywine provides tremendous portfolio diversification. The correlation between Brandywine’s Symphony program and the S&P 500 is a (negative) -0.02.
Also, despite the strong rally in stocks and the recent decline by Brandywine, over the past two years the aggressively-traded Brandywine Symphony Preferred Fund has outperformed the S&P 500 (a +17.25% annualized return for Brandywine vs. a +12.77% return for the S&P 500 total return index.
If you are prepared to take an analytical—rather than emotional—approach to investing, please call us to discuss how an investment with Brandywine can improve your portfolio’s overall returns and reduce your risk. The time to diversify is now, not after stocks suffer a decline.
Because we reference historical tested performance in this report, the following disclaimer is required:
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
